After a while our resources will start to become scarce and so only a certain amount can be produced e.g. When an economy is producing goods it may have the resources to produce 40 units of manufactured goods and 40 units of non-manufactured goods, and the economy decides to produce more manufactured goods then it would mean the amount of non-manufactured goods would go down in order to produce more manufactured goods. This is another example of opportunity cost, the sacrifice of producing manufactured goods over non manufactured goods. We can show the amount of goods and services an economy is capable of producing by determining the quantity and quality of resources available to it. These combined with the state of technical knowledge will determine an economies production possibility. We can show an economies production possibilities on the diagram below:
The curved line is known as the production possibility frontier, (PPF) and is showing the different combinations, and we can see how many goods it could produce if all of the economies resources were being used as well as full and efficient employment. We can see that at point:
- A and E that all the resources are dedicated to either manufactured or non manufactured goods
- B and D there is a combination of products produced but with a slight bias towards one or the other
- C there is an equal production of manufactured and non manufactured goods
- F is shown so that none or many of the available resources are being utilised
Points A and E are extreme cases where these particular countries in the C21 would be fictitious.
The production possibility frontier is based only if all the resources in an economy are fully and efficiently employed. In the case of unemployed works or idle factories or inefficient production the economy cannot be producing on its PPF. If there is unemployment then there will be economy production is at point F. Economies will never produce at the white point on the diagram as this amount of production is unattainable, and an economy will never be outside the existing PPF due to the fact that by definition the PPF is showing the maximum production level of an economy. If there is however an increase in the productive potential, then the PPF could move outwards, we call the increase economic growth. Economic growth can only occur if:
- The resources available for production increases e.g. the number of workers in a factory or new offices
- The quality or quantity of resource will increase e.g. technical progress allows machines and production processes to produce more with the same amount of resources
There is also another way of drawing the diagram above, but instead of using a curved line there would be a straight line, this diagram is not as helpful as the PPF with a curved line because when we decide to produce more manufactured goods a curved line gives a better indication of how many goods can be produced if we need to give up some non agricultural goods.
